Please pour me some pipeline honest-tea

May 18, 2011: With the ink barely dry on the press release announcing that the Denali natural gas pipeline partnership between BP and ConocoPhillips was being dismantled, arm chair gas line experts and public policy dreamers wasted no time in opining about the meaning.

First lets be brutally honest; with the glut of natural gas on the global market today and the depressed prices, the truth is no Alaskan natural gas pipeline project is economical today. In June of 2008, natural gas was selling for almost three times the price it stands at today. With the saturation of gas availability world wide and the collapse of the price, the economics for Alaska's producers are all upside down.

This impacts everything from a large diameter line through Canada to the over hyped LNG line to Valdez. As the Denali group discovered, you can't find customers willing to sign the necessary long term ship or pay contracts worth billions with so much uncertainty in the marketplace. 

Denali pulled the plug on their three year effort because as a private sector organization they realized that continuing to push forward with a futile effort would mean continuing to throw good money after bad, a practice highly frowned upon by shareholders.

Contrast that seemingly logical approach to the state's backed AGIA plan, whereby TransCanada is contractually obligated to push ahead regardless of market conditions, fueled by taxpayers who are paying ninety cents out of every dollar they spend.

TransCanada would have folded their tent a long time ago if they were responsible for taking the risk themselves. But when it's other people's money, the definition of logical approach is much different then when you're spending your own cash.    

Second, regardless of the price of natural gas, the state's AGIA approach will never allow for an economically viable pipeline project and will simply continue to drain the state's treasury while policy makers cling to this fantasy.

Since the very beginning, the creators of AGIA have understood that their approach was nothing more than a state funded attempt to extort the producers into committing gas reserves to a pipeline that they'd have little or no control over.

During the debate over AGIA years ago, former DNR Commissioner Tom Irwin told lawmakers that the goal was to have a failed open season and then use public and political pressure to force the producers to commit gas to an AGIA line, thus handcuffing them to the state's strictly prescribed financial and legal terms.

AGIA is and always will be an absolute backassward way to get Alaska's natural gas reserves monetized.

In fact, the rapid and unforeseen collapse of the country's natural gas prices further highlights the unrealistic approach of AGIA. Why would any producer roll over and lock themselves into state sanctioned mandates given the uncertainty of the market place and the risks involved? The answer is they wouldn't.

This is evidenced by the fact that although Exxon has partnered with TransCanada and are enjoying the terms that allow for a ninety percent state funded reimbursement, they have not signed the AGIA agreement. After all, why get roped into buying the cow when the milk is free? 

However, even though I've argued the imminent failure of AGIA since it's introduction back in 2007, some continue to live in a fairy tale land where the state dictates the financial and legal terms of the largest privately funded construction project in the history of the United States. 

In his response to Denali disbanding, Governor Sean Parnell surmised that the event could allow both BP and ConocoPhillips to join the state's AGIA effort.

Honestly, how does that even pass the straight face test?

Denali disbanded because they failed to attract customers for a pipeline without AGIA's costly mandates. So why in the world does Parnell believe that the principles of Denali and other potential customers would find it more advantageous to jump into bed with a state sponsored proposal that is costlier and more risky?

Gov. Parnell should remember the words spoken by TransCanada's own Tony Palmer, "no customers, no credit, no pipeline."

Parnell's response is trying to put a brave face on his continued support of an effort he knows deep down will never result in an economically viable project. I mean this is a governor who has repeatedly said he believes in a private sector approach to building the natural gas line. AGIA doesn't and never will square with that belief.

Even back when natural gas was selling for almost $13 a unit, AGIA never made sense and only represented a desperate attempt by policy makers to feel like they could create leverage over the North Slope producers. Unfortunately, they only created false hope among the uninformed while marrying off the state's treasury to the tune of $500 million for an exercise in futility. 

State government will never be able to force a project on the North Slope producers.

The only influence the state has on developing Alaska's natural gas reserves is permitting and taxes. Transcanada knows this very well. It's why during the AGIA hearings they demanded the state reimburse them ninety percent of expenses after the open season in order to even consider bidding on the AGIA license.

Again, if AGIA was solely paid for on Transcanada's dime, they'd be home in Calgary.

Meanwhile, some are seizing the opportunity to once again pimp the All-Alaska line and other options. On line news stories of Denali's demise has brought arm chair gas line experts out of the woodwork. Time to fund ANGDA, time to build the LNG line, time to buy a Zeppelin and ship natural gas to markets by air.   

But the economics of the LNG line to Valdez have already been thoroughly debunked and any in-state bullet line proposal will require a healthy subsidy from the state treasury to make it affordable, all while failing to generate the much coveted revenue stream.

To add insult to injury, the state's AGIA contract with Transcanada strictly prohibits any sizable competing project from taking gas off the North Slope.

If it wasn't for the memories, we'd have nothing.

Remember when the Palin administration predicted the gas line would be profitable at any price? Remember when the Palin administration predicted if the producers refused to commit gas to the AGIA project they'd sue and take back their North Slope leases?

Remember when Palin and a collection of lawmakers predicted that AGIA was the only way Alaska would ever get a natural gas pipeline and that producers would be forced to cave into the state's costly demands? Remember when prophets like Gara, Irwin and Palin predicted a gas pipeline doomsday if AGIA wasn't passed? 

The bottom line is policy makers are going to have to start making the tough calls given that Denali has just confirmed what's been known for years; the state's current natural gas pipeline approach is not going to deliver gas to markets.

AGIA will be former Governor Sarah Palin's legacy.